LONDON (Reuters) - Supervisors should focus on improving boards at top banks now their work on toughening up rules was coming to an end, a group a report from a think-tank of former central bankers said.
The 2007-09 global financial crisis unleashed a flurry of new rules that will force lenders to hold more capital after many of them had to be bailed out by taxpayers.
As those rules are being phased in, the Group of Thirty’s chairman, former European Central Bank President Jean-Claude Trichet, said it was time to improve the quality of day-to-day supervision of bank boards.
A “new paradigm” is needed to make the boards of big banks take supervisory relations seriously and demonstrate that they understand its importance to improve public trust, Trichet said.
“They need to be open to supervisors so supervisors can do their job. More boards need to focus on risk culture,” he told a news conference at the Bank of England in London.
The 61-page report urged a shift away from bank’s focus on short-term profitability which has created a temptation to take risky decisions.
“High quality supervision is a lot less expensive than a financial crisis,” John Heimann, a former banking supervisor at the U.S. Comptroller of the Currency said.
David Walker, a G30 member and chairman of UK bank Barclays (BARC.L), said changing banking culture was hard and many lenders were at the very early stages of a journey.
The report said banks and their supervisors have already begun to work more closely but more needs to be done to tackle “softer” issues like instilling the right culture.
The G30 recommendations echo steps taken in Britain where top supervisor Andrew Bailey has called for a better “tone at the top” to give employees at banks an example to follow.
Regulators gleaning lessons from the financial crisis found overpowering chief executives dominating boards stuffed with non-executives who did not fully understand risks in activities such as financial derivatives and who failed to challenge CEOs.
A low point came in July 2012 when the Bank of England pushed out Barclays’ Chief Executive Bob Diamond after the lender was fined for rigging the Libor interest rate benchmark. Barclays’ chairman also left and was replaced by Walker.
“Supervisors need to know that boards are doing an effective job and to act appropriately if they are not,” the report said.
“When difficult issues must be addressed at an individual financial institution, or in times of financial system stress, solid supervisory-board relations can help immensely in achieving an expeditious solution,” it added.
Reporting by Huw Jones; editing by David Evans